Dave fine live site--free--for bond info---there has been a major shift---they now our indicating yet another cut in October(it is Japan deja-vu)--http://www.bondtalk.com/global.cfm?S=home
August 10, 2001
PPI Data Consistent With Leading Inflation Indicators
Fears of deflation are misplaced; other factors will keep prices from falling
Written by Tony Crescenzi , CEO BondTalk.com
The producer price index shows the obvious effects of the slowing economy and it appears that disinflation is at hand. While some market participants might argue that the whopping 0.9% drop in the overall PPI is an indication that the U.S. is about to enter a period of deflation, there's still little basis for that view. Commodity prices simply account for too little of the inflation picture for that view to have credence.
The main reason that the PPI fell as much as it did was due to energy prices, which fell 5.8% for the month. The biggest factor behind the energy price drop was a 17.7% plunge in the price of gasoline, the most in 15 years. Gasoline, in fact, accounted for the bulk of the PPI decline, shaving 0.7% from the headline number. Thus, the PPI excluding gasoline was down 0.2%.
Also contributing to the decline in the PPI was a big drop in food prices, which fell 0.6%. Food prices represent about 22% of the PPI, so the 0.6% drop shaved 0.1% from the index. food prices were led lower by a 13.6% drop in the cost of fresh fruits and melons.
Outside of food and energy, prices generally rose. the index for capital equipment, for example, increased by 0.2% in July owing to a 2.35 rise in the cost of light motor trucks. Prices also rose on aircraft, ships, and heavy motor trucks.
Miscellaneous price increases included radial tires, women's apparel, and pharmaceuticals.
Pipeline Data Points To More Good News on Inflation
The so-called pipeline on future inflation trends was very favorable. Crude materials, for example, the earliest stage of production, fell 5.3% in July following declines of 6.0% in June and 2.3% in mazy. Core crude goods, which are crude materials excluding food and energy, fell 0.9% in July following declines of 0.2% in June, 0.2% in May, and 3.3% in April. They have declined every month this year.
Intermediate goods prices also declined, plunging 0.4%, the biggest drop on record. Core intermediate prices have historically been highly correlated with finished goods prices, so the big drop is noteworthy. The drop suggests that in future months, the PPI might continue to decline.
Deflation Fears Misplaced
Some market participants might surmise that the drop in the PPI hints at deflation. There are a couple of arguments against this notion. First, outside of food and energy, the trend in producer prices hasn't changed much in recent months; at 1.6% year-over-year, the core PPI is close to the middle of the range of 1.3% to 1.9% posted over the past year.
Second, the PPI largely reflects trends in commodity prices and does not capture the impact of a variety of other inflation determinants. Wages, for example, account for the lion's share of the cost of producing goods, at about 70%. Commodities, on the other hand, account for just 10% of the cost of producing goods. These days, wages continue to grow strongly. Average hourly earnings, for example, are up 4.4% year-over-year, a 3-year high. Moreover, as the Fed noted in their most recent Beige Book, benefit costs are also rising sharply. Both of these factors strongly weigh against the likelihood of sustained deflation.
The best bet is that the U.S. will experience disinflation, with inflation rates falling, and will not experience deflation except in the very short run, as the energy price plunge works its way through the data.
The Markets Were Forewarned Of PPI Drop
Today's PPI should not come as a complete surprise to market participants. Numerous indicators had forewarned of the very possibility of a sharp drop. The Journal of Commerce index, for example, a key gauge of industrial materials price pressures, has plunged recently to a 29-month low. In addition, the NAPM price index has been below 50.0 for five straight months, indicating that prices have been declining. Moreover, the drop in gasoline and other energy products such as natural gas have been highly visible to the markets. Who didn't already know that gasoline prices had plunged?
Nevertheless, the PPI is very favorable for the markets and the economy. Falling producer prices should help lift profit margins and this should eventually help contribute to a recovery in capital spending and hence, the economy. Consumers will benefit from an improvement in the buying climate. |
